Special Report: As a premium supplier in an industry with high barriers to entry, Orbital’s business model has proven resilient amid the ongoing market downturn.
The impact of COVID-19 has left many ASX companies scrambling to adjust – and in some cases, survive.
In that context, the phrase “business as usual” is something of a luxury. But it’s one that’s been afforded so far to Orbital UAV (ASX:OEC), the Perth-based manufacturer of advanced spark ignition propulsion systems for unmanned aerial vehicles (drones).
Speaking with Stockhead, CEO Todd Alder said the company “hasn’t seen any demand-side impact” from its global client base, which is underpinned by a long-term sales agreement with Boeing subsidiary Insitu.
The company expanded its global customer base in March, when it signed a product development contract with a major Singapore defence company.
“They’re keen to get on with it,” Alder says. “Our customers’ expectations are unchanged, orders remain in place and we’re focused on delivering on our targets.”
“So I think compared to industries facing a direct impact such as airline or travel operators, our focus and strategy really hasn’t changed.”
“We love the barriers to entry, now that we’re through them”
The result of those robust market dynamics is that Orbital’s share price has remained buoyant in 2020 amid the broader COVID-19 bear market.
Despite another recent client win, Alder said the outperformance is actually a by-product of strategies first put in place three years ago.
“That’s when we narrowed the focus of the company, from a business working on multiple projects to one where all our staff are focused on the same thing; to help build the best engines for military drones,” Alder explained.
And he highlighted while defence contracts provide the basis for a robust business model during market downturns, there’s also a reason for that – they’re not easy to win.
“It’s important to understand that it takes years of work with Tier 1 defence companies to establish credibility,” Alder said.
“You can’t just knock on the door and land a deal. It takes years to establish relationships and that’s just part one.”
“Then it’s a multi-year process to develop prototypes and build confidence. It’s one thing to get approval from a company like Boeing, but getting to a comfort level where they’re prepared to send the product out to US defence forces takes a lot of work.”
Positive feedback loop
The result of that work is that Orbital has now been designated by Boeing as the primary supplier for two Insitu designed engines.
And as the company establishes itself as the supplier of choice with products in the field, Alder said it’s now in a position to benefit.
Along with the Singapore customer announced in March, he said the company is “planning to announce an additional customer before the end of the year”.
“You’ve got to get your product out there. That’s the difference with Orbital compared to preceding years – this financial year we have two products out in the field and we’re seeing the benefits of that positive feedback loop.
The net result is that Orbital is one of the few ASX small-caps in positive territory for 2020.
“I think the market is starting to see that we’re doing what we said we were going to do,” Alder said.
“Investors are gaining confidence in the execution, and we’ve attracted more attention on the back of that.”